Android - The Thorn In Apple’s Side?

Reports out this morning indicate that Android has become the #1 Smartphone OS in Q4 2010. First let’s give credit where credit’s due - 33M phones and 615% growth y-o-y is great by any standard. Having said that, we know that the bulk of industry profits still go to Apple and Android is on its way to becoming the new Nokia - large market share, but low profits. Horace’s report this morning was pretty timely - on a side note, it would be great if he could do a similar report just for Smartphones.

We also saw Apples tablet market share drop from 95% to 77% - and that’s with just one real competitor, Samsung Galaxy Tab. Given that there are about 100 Android tabs getting ready for launch, Apple’s market share will continue to decline, if for no other reason, just the sheer number of competitive offerings.

So while Apple continues to post humongous numbers for revenue/profit growth, and is selling devices as fast as it can make them, the fact is that Android has enabled tens (if not hundreds) of new competitors to play in the Apple sandbox. None of these companies could have dreamed of launching tablets within 9 months of Apple game changing product had it not been for Android. Same is largely true for Smartphones.

My point is that Android will impact Apple’s future growth rates in ways that Windows Mobile, Symbian, and Blackberry would not. What can Apple do to counter this threat?

Some thoughts to get the discussion started:

1. Increase production capacity - the argument here is that if they could make more, they could sell more and thereby prevent competitive offerings from taking hold
2. Increase distribution channels - Samsung didn’t sell 2M tabs because its a great product - the reality is that when you launch with 200 partners on day 1, you’re going to sell a few. iPad’s didn’t seem to be supply constrained, but they were in about 46 countries in Q4 - is the competition getting a free ride again in regions/countries where Apple doesn’t have the iPads?
3. Take the fight to Google in their core business - Search?
4. Do nothing - small(er) market share doesn’t matter as long as profits are robust?

Apple had 16.6% of the world market in Dec. At least 28 competitors shared 83.4%. Google threw up a desperation shot to stay in the game. They are dragging the world’s electronic manufacturing base along. Nobody’s taken this ride before. Apple’s in the front seat with their arms straight up.

Samsung Electronics Co.?s Galaxy Tab, the company?s answer to Apple Inc.?s iPad, isn?t selling as well as the company has let on.
In early December, Samsung announced it had sold 1 million, declaring that sales were going ?faster than expected.? Then, in early January, Samsung announced sales of 2 million.

But during the company?s quarterly earnings call on Friday, a Samsung executive revealed those figures don?t represent actual sales to consumers. Instead, they are the number of Galaxy Tab devices that Samsung has shipped to wireless companies and retailers around the world since product?s formal introduction in late September.

Pressed by an analyst at an investment bank, the Samsung executive, Lee Young-hee, acknowledged that sales to consumers were ?quite small,? though she didn?t give a specific number.

In her comments, she used the terms ?sell-in? to reflect Samsung?s sales to distributors and ?sell-out? to reflect the distributors? sales to consumers.

Ms. Lee?s response to the analyst:

?Well, your question was on sell-in and sell-out. As you heard, our sell-in was quite aggressive and this first quarterly result was quite, you know, fourth-quarter unit [figure] was around two million. Then, in terms of sell-out, we also believe it was quite small. We believe, as the introduction of new device, it was required to have consumers invest in the device. So therefore, even though sell-out wasn?t as fast as we expected, we still believe sell-out was quite OK.?

She added Samsung was ?quite optimistic? about 2011 sales but wouldn?t provide a forecast. ?As you know, the tablet is relatively new and we need to see how the market develops before we give any firm numbers,? Ms. Lee said.

Problem is Android smartphone users are highly likely to go for an Android tablet for economic and familiarity reasons, same way Apple consumers tend to expand their Apple platform of products. Looks like both platforms will hold major market share. Apple’s advantage will remain consumers buying quality, value and service.

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Samsung Electronics Co.?s Galaxy Tab, the company?s answer to Apple Inc.?s iPad, isn?t selling as well as the company has let on.
In early December, Samsung announced it had sold 1 million, declaring that sales were going ?faster than expected.? Then, in early January, Samsung announced sales of 2 million.

But during the company?s quarterly earnings call on Friday, a Samsung executive revealed those figures don?t represent actual sales to consumers. Instead, they are the number of Galaxy Tab devices that Samsung has shipped to wireless companies and retailers around the world since product?s formal introduction in late September.

Pressed by an analyst at an investment bank, the Samsung executive, Lee Young-hee, acknowledged that sales to consumers were ?quite small,? though she didn?t give a specific number.

In her comments, she used the terms ?sell-in? to reflect Samsung?s sales to distributors and ?sell-out? to reflect the distributors? sales to consumers.

Ms. Lee?s response to the analyst:

?Well, your question was on sell-in and sell-out. As you heard, our sell-in was quite aggressive and this first quarterly result was quite, you know, fourth-quarter unit [figure] was around two million. Then, in terms of sell-out, we also believe it was quite small. We believe, as the introduction of new device, it was required to have consumers invest in the device. So therefore, even though sell-out wasn?t as fast as we expected, we still believe sell-out was quite OK.?

She added Samsung was ?quite optimistic? about 2011 sales but wouldn?t provide a forecast. ?As you know, the tablet is relatively new and we need to see how the market develops before we give any firm numbers,? Ms. Lee said.

A Samsung spokesman in an email said Monday that most media accounts treat Galaxy Tab as ?a noteworthy accomplishment.? He added, ?I believe the company, overall, is on the same page.?

Very interesting…I had missed this - so the real test will be to see how many “sell-ins” they report next quarter. Nonetheless, I think the original premise holds - i.e. with hundreds of devices shipping in the near future, there will be reduction in iPads market share - it will be interesting to see if it can hold the high 60s to low 70s mark by this time next year - if it does, there’s no catching up - then it will be just like iPods.

Problem is Android smartphone users are highly likely to go for an Android tablet for economic and familiarity reasons, same way Apple consumers tend to expand their Apple platform of products. Looks like both platforms will hold major market share. Apple’s advantage will remain consumers buying quality, value and service.

I dont agree with this as a forgone conclusion. We have Samsung Galaxy Tab with a channel fill of over 2M and unknown sales in what should be the strongest qtr of the year. We know Apple has scale on the iPad over every manufacture which leads to either lower cost or higher margin or both, depending on the competitor. Apple is one of the few CE manufactures with their own retail, all the other manufactures must convince partners to carry their stock, and retailers would much rather carry a product with higher stock turnover so these other manufactures need to offer better incentives then Apple to even get shelf space. I doubt the tablet space will be as tied to the carrier/operator model and while subsidies will play a role, I think retail distribution will be more important. Apple will not compete against the $100-200 whitebox tablet manufactures, so when you do all these market share metrics it will appear that the iPad market share is dropping at the same time they are achieving record breaking sales, because the folks making the metrics still haven’t decided what goes in a particular bucket. You are witnessing the same thing with the iPhone. It will be interesting to see what kind of brand loyalty is created via Android. Are folks loyal to the OS & Apps or to the hardware manufacture or neither for that matter. For example, If people dislike their moto Droid, do they switch to an HTC or Samsung running Android because of brand loyalty to Google Android or do they switch to iOS or WP7 because of their experience with the Droid. On the tablet side people are writing Androids success as if it is history and we are only waiting on the obvious. Apple as the market leader is well ahead in the acceptance/adoption both in the consumer space and corporate/education. You can’t yet assume any other manufacture will be equally successful at least till they get some market exposure and prove they provide a viable alternative in the real world.

It is dangerous to jump to conclusions about a market when that market is growing at 90 or more percent a year. It is even more dangerous to jump to conclusions when one of the leaders in that market (Apple) is supply constrained.

The truth is that right now Android is not winning in a head-to-head battle with iOS products. In fact, the opposite appears to be true. Wherever Apple products and Android products go head-to-head, Apple products win handily. Android products are not so much growing as they are filling the voids left by iOS.

There are (at least) three voids where Android is thriving:

Production: Android manufacturers have, collectively, been able to grow and meet the demand in this rapidly expanding market while Apples’ iOS production has only barely been able to keep pace.

Carriers: Carriers have distorted sales in at least two ways. Apple’s exclusivity agreements have denied availability of the iPhone to millions of users. And Verizon, in particular, has distorted the market by reputedly spending 100 million dollars to create and market the Droid line.

Margins: Android products may or may not be making money, but one way to sell product is to lower prices.

Production: Apple is diligently working to address the issue of production. Their production of GSA iPhones rose from 9 to 14 to 16 million units over the past 3 quarters. We may assume that GSA production will continue to increase in the coming year, although there may be a lull later this year in anticipation of the introduction of the iPhone 5. Further, we may assume that Apple has created and stockpiled a large number of CDMA phones in anticipation of the introduction of the Verizon iPhone. Rumors have the number of CDMA phones as high as 7.1 million units. I’ll believe it when I see it. Nevertheless, we may assume that Apple will continue, especially with the iPhone 5 to make great strides in increasing their productive capacity.

Carriers: Apple has also ended all exclusive carrier arrangements. This is not the same as the iPhone being available on all carriers, but its a start. At this point, I think it’s a seller’s market for Apple. Every carrier wants the iPhone and Apple doesn’t have enough of them to go around. When Apple is able to solve their production shortages, I think carrier shortages will disappear too.

Margins: The question of low-margin phones is the only area where Apple may not be able to compete because Apple does not choose to compete in the low-margin arena. Many believe that this is Android’s greatest advantage and Apple’s Achille’s heel. I think that this is only true if Android proves to be “sticky.” In other words, it doesn’t matter if Android sells you your first smartphone. What matters is what people buy when they have a choice between an Android phone and an iOS phone.

Conclusion: The future is uncertain, but here are three reasons why I feel that iOS has nothing to fear from Android. Customer Satisfaction with the iPhone and iPad, Customer Loyalty and Product Reliability. If Apple can continue to maintain that Trifecta, they’ll be feeling no pain when the Smartphone wars begin in ernest.

Your New Smartphone Is Already a Dinosaur
by David Goldman
Monday, January 31, 2011

Smartphones are continually outdueling one another in terms of performance, and they’re coming to market at a breakneck speed ... “The beauty of Android is that it’s completely open,” said Marcelo Claure, CEO of Brightstar, a global mobile phone distributor. “All the equipment manufacturer has to do is slap a skin on top of it and market the phone.” ... The Qualcomm/Android (“Quadroid”) standard that has developed over the past couple of years has freed up smartphone manufacturers to focus most of their attention on marketing and making their devices thinner, sleeker and higher-functioning than competitors’ ... “It will be just like the development of the PC industry—everyone will keep trying to outdo one another to stay alive.”

Good article that throw light on why Android is indeed a threat to iPhone.

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The author sees the Android culture as enabling manufacturers to produce faster better phones each quarter. Where is the continuity? How are the buyers in this market evolving so quickly? How can expensive accessories makers keep up? Who can do reliable quality control at that pace? These phone makers will live fast, play hard, die young and make a good looking corpse.

Apologies to Romano, but Android makers spring from a similar culture where the desperate try to escape.

Or stretching it a little Android is the crack for those who must manufacture. It feels good for a while.

Or it’s a diversion to distract the best development minds in the business.

To the tech manufacturers Apple must appear as an untreatable cancer, it just doesn’t stop.

Interesting that there’s only one mention of iPhone in the article, isn’t it? It’s really just a feature on the insanity that is the Android phone landscape.

But do they change much, really? The underlying processor speeds haven’t…still a mostly once-a-year-improvement thing. Screen resolution, barely. Last I checked HD video and max 8MP camera were the top of the range. It feels more like manufacturers are overwriting their own products. Why worry about iPhone’s competing with Android when things are like this? Never mind that Apple thrives on competition. Moto/HTC/Samsung are their own worst enemies, fragmenting their own product lines what seems like every single month. This confusing array of models and lack of OS update consistency is no way to treat your customers.

It’s particularly amusing that the self-fragmentation makes it that much easier for iPhone X to be the top-selling smartphone for the foreseeable future.

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Thanks, Steve.

I think Android is less of a thorn in Apple’s side than most of the tech press or some of the responses here.

The direct comparison of Android to iOS is meaningless. Market share as a measure in the PC wars was an indicator and shorthand for revenue. Microsoft had huge market share and huge revenue from Windows. Mac had very small marketshare in the PC market and it’s revenues were comparatively small.

The smartphone OS wars are very different. Even if it were true (and I’ll argue it isn’t in just a bit) that Android came to dominate smartphone marketshare, looking at revenue share reveals a very different situation. Apple has only 20 something percent of the smartphone market (I’m too lazy to get the exact figures but you can check) and something like 5% of the overall phone market they have 40+% of all mobile phone revenue. I’m sure its obvious that revenue and profit, not market share per se that drives a business which is why this outdated focus on market share is virtually meaningless. Even the argument that market share determines developer energy doesn’t seem to have played out as we see from Google’s sudden decision to bolster its Marketplace by funding new and innovative Android apps.

An analysis of the Q3 2010 activation figures at AppleInsider says that included in the Android activation numbers are forks of the Android OS which have nothing to do with Google. Search, maps, etc which are Google services (and how Google makes money from Android) are all stripped out and the UI is changed. Examples are China Mobile’s Ophone and Tapas, another highly customised Android variant in China are counted as Android numbers though they serve no economic value to Google.

And if you look at the market share Android HANDSET growth in Q3-2010 v Q3 2009 you’ll find Samsung down 2.4%, LG down 3.7%, Sony down 1.8% and Moto down 2.4% and that’s before Verizon downplays Android devices for the iPhone. According to this analysis the only place where Android numbers are up dramatically are in China where Android means something entirely different (oPhone and Tapas). So while the raw numbers of Android are up, the scrum among individual Android handset makers are brutal and at least 1 of them (Motorola) is starting to look dangerously troubling from a financial point of view and the CEO of LG was quoted as saying that Android is not the way forward. Next week Nokia is going to join this Android scrum in a unique way IMO and things will improve for Nokia at Sony and LG and HTC and Samsung’s and Motorola’s expense.

We’ve now learned that the Samsung Galaxy Tab numbers were vastly overblown and that its return rate was unusually high making a mockery of any of the current market analyses for tablet market share but the smartphone situation holds true, ie, OS market share is not an indicator of revenue share and ultimate profit. Its hard to imagine that iPad will retain 90% of the market. For political reasons that’s not even desirable. But as pats pointed out Apple have real competitive advantages in terms of component buying power, distribution and marketing as well as the lock-in advantages of Apple’s interlocking platforms.

And most important is this snippit from the above quoted article:

?The beauty of Android is that it?s completely open,? said Marcelo Claure, CEO of Brightstar, a global mobile phone distributor. ?All the equipment manufacturer has to do is slap a skin on top of it and market the phone.?

This shows such a fundamental lack of understanding of why Apple products are great and why competitors products are only good. If all you’re going to do is slap an OS into your hardware and skin it then you may have an interesting electronic toy but a) you can’t easily upgrade it b) there is no ecosystem to add customer value, c) its not 100% interoperatable with other Android OS devices including your tablet may not be able to use your smartphone apps. In short, the relentless attention to detail across devices that makes Apple products so desirable and more importantly, easy to use and a great customer experience is simply not there. Some customers won’t mind. But hundreds of millions of people who aren’t geeks will find the Apple approach highly desireable.

And in the meantime Apple profits are growing at unheard of multiples while Google’s share price languishes, LG and Samsung and Sony and Motorola report lackluster gains or overall revenue losses on phones and will do so to with Tablets IMO.

I think it was Joseph Campbell who first said that people are so intent on climbing the ladder of success that they don’t realise its leaning against the wrong wall. That’s what’s going on with all this Android v iOS analysis. Apple is the only company making massive revenue from smartphones while the argument about market share dominates the news.

Interesting that there’s only one mention of iPhone in the article, isn’t it? It’s really just a feature on the insanity that is the Android phone landscape.

But do they change much, really? The underlying processor speeds haven’t…still a mostly once-a-year-improvement thing. Screen resolution, barely. Last I checked HD video and max 8MP camera were the top of the range. It feels more like manufacturers are overwriting their own products. Why worry about iPhone’s competing with Android when things are like this? Never mind that Apple thrives on competition. Moto/HTC/Samsung are their own worst enemies, fragmenting their own product lines what seems like every single month. This confusing array of models and lack of OS update consistency is no way to treat your customers.

It’s particularly amusing that the self-fragmentation makes it that much easier for iPhone X to be the top-selling smartphone for the foreseeable future.

It is foolish to try to defy Moore’s law. The majority of the components in a smartphone are based on silicon manufacturing and subject to that cycle. Mid cycle most processors can get a bump in performance since the yield of higher performance chips improve, so for example the iPad A4 chip is currently clocked at 1GHZ but they could probably run at 1.2GHZ. If Apple continues to provide an annual update cycle, it will be driven by their ARM based processor. The android manufactures are busy churning out different models because someone in the Android camp delivers a model which makes their offering old either because it relies on older silicon or an older version of the Android OS with some killer feature. The folks like HTC can’t afford to support the old handsets because they are sold with such low margin, that they just make a minor update and rename the device and hope the consumer bites.

As far as the processor roadmap, at the top end it is driven by the process node. This year the IBM Fab club is moving to 32/28 so folks can expect Apple to deliver an ARM Cortex A9 with Power VR GPU this year using the 45NM process. Next year in 2012 would be a die shrink to the 32NM process which will allow for reduced power consumption and improved performance in the range of 40% less power and 20% performance improvement. They will also have the option of including additional CPU & GPU cores by making a larger die. In 2013 I would expect the introduction of a processor based on the ARM Cortex A15 based on the 28NM process. This core will have performance similar to the current macbook Air in a cellphone size package.

Since I started this thread, we have learned that the Galaxy Tab numbers were not real “sold to customers” - just filling the channel. And there was a recent report about how the Android Smartphone numbers included versions of the OS that have since forked off and cannot be called Android phones since they don’t run the apps designed for Android (among other issues). So the 33M smartphone number for the past quarter is also suspect. That’s all good.

It’s clear to me that if Apple can manage to keep tablet market share of 70%+ (like iPods) and increase it’s smartphone marketshare above the 17.5% it has today, we could be seeing revenue/eps growth rates 60-70% for the next 2-3 years - as it is today, most of us expect that while the revenue/eps growth rates will be very strong this year, they will start to moderate in 2012/2013. Clearly, if there was no Android, I can’t even imagine what the current/future growth rates would be - but no point thinking about situations that are not true - so the question is, is there something Apple can/should do, to put a serious dent in Android’s growth. Most of us here already know of all the things Apple has done already (VZ iPhone, phenomenal app store, locking up critical components, etc.) for iOS - I’m looking for new things that might not be as obvious. Of course, the answer could be just as simple as - they’ve done what they need to - now let’s just sit back, relax, and watch it play out - but what’s the fun in that? :drool: